What is Electronic Check Processing?
Electronic check processing means that you can convert a paper check received from a customer into an electronic transfer (sometimes called an e-check) that takes funds from your customer's account and places them into your account. (You may have seen transactions of this type on your checking statement.) This transfer takes place via the Federal Reserve Bank's Automated Clearing House (ACH) system. It's a faster, less-expensive way to get your money.
What is the ACH Network?
Put very simply, the ACH network moves money from one entity to another--electronically. The Automated Clearing House (ACH) Network is a highly reliable and efficient nationwide batch-oriented electronic funds transfer system which provide for the interbank clearing of electronic payments for participating depository financial institutions. The Federal Reserve and Electronic Payments Network act as ACH Operators, central clearing facilities through which financial institutions transmit or receive ACH entries. The process is governed by NACHA, The National Automated Clearing House Association (nacha.org), operating rules and business processes.
ACH Transaction Types:
Direct Deposit of payroll, Social Security and other government benefits, and tax refunds Direct Payment of consumer bills such as loans, utility bills and insurance premiums Business-to-business payments Electronic Checks (E-checks) E-commerce payments Federal, state and local tax payments.
If you're getting your paychecks directly deposited into your bank account, you're already using the ACH network. You can leverage this system for your business so that you never need to go to the bank again--you can process checks electronically from your computer.
Processing Electronic Checks
Electronic check processing is the means by which you can take a paper check and submit it for payment electronically instead of taking it to the bank. Your bank may offer you this capability if you purchase a check scanner from them. The scanner takes an image of the check and submits that image to the bank electronically. The bank then processes that check just as if you had handed over the physical check itself.
An easier way to process checks electronically is to use a software program or a web-based payment processing service. When using a web-based system or ASP, you don't need to install any software or buy any hardware. You simply key in check information and submit the transaction.
The process is simple:
1. Notify
You must notify your customers that their paper checks will be processed electronically. You can do this in writing on your invoices, or you can post a sign with this information at your place of business.
2. Collect and Convert
When a paper check is presented as payment, it is converted to a one-time ACH-based electronic payment, with pertinent information regarding the customer's financial institution and account number captured. You then make an image for archival purposes (you should keep this copy for 2 years), stamp the original check "VOID" and discard it.
3. Process
An ACH file is created and presented to your financial institution--this is typically done by the payment processing system you are using; the payments are processed through the ACH network, the customer's account is debited, and your account is credited. It typically takes about two business days for the money to reach your account; this is about the same time it takes when you submit a paper check to the bank. However, you will be notified of insufficient funds in about 48 hours with an electronic transaction--it can take over a week to get that information with a traditional transaction.
4. Confirm.
Once your customer's account is electronically debited, the payment is listed on their bank account statement under "other electronic payments" or a similarly labeled area. The description will include the check number, amount, and the billing company name. Your customers won't be able to get a copy of the check with their statements, but they can request that you provide a copy (which is why you need to keep one in your files).
Electronic Check Processing Enables Your Business To:
Improve cash flow with quicker access to your money Save your customers time and money Increase on-time collections Receive 48-hour notification of NSF Eliminate manual reconciliation of insufficient funds Eliminate time-wasting trips to the bank
Why Use Electronic Check Processing?
It costs on average $1.22, in manpower and incidental costs, to process a paper check. Electronically processing that check can cost as little as 55 cents. Check conversion requires very little effort or time to set up, and once it is established, your company immediately begins saving money. Your customers will appreciate the convenience too! With electronic check (or e-check) processing they can give you the check information over the phone, or submit it via an online form. They no longer need to pay postage! Check conversion relies on the same secure network used for Direct Deposit and Direct Payment, the Automated Clearing House (ACH). The Federal Reserve's Regulation E and the NACHA Operating Rules regulate electronic payments processed through the ACH network.
Because of Reg E and NACHA's Operating Rules, consumers have greater protection with check conversion. Check conversion is the fastest-growing type of electronic payment ever. Over 1 billion consumer bill payments by check were successfully converted to ACH payments in 2004. Check conversion reduces time and resources needed to process payments, resulting in continued cost savings to your company. Electronic processing reduces the burden on our nation's transportation systems and the environment. It takes a considerable amount of fuel to ship our country's millions of checks each year between companies, financial institutions, and customers.
(statistics provided by electronicpayments.org)
Tips for selecting an Electronic Check Processing System
Choose a system that does not require you to purchase expensive hardware or software upfront Look for a flat rate on electronic check transactions--you should never have to pay a percentage of the transaction to the processor. Pay attention to both monthly fees, transaction fees, and monthly minimums to select a system that makes the most financial sense for your business Choose a system that securely stores customer information so that you will be able to eliminate duplicate data entry when your customers submit multiple payments. Choose a system that can easily export customer data so that you can automate your entire a/r system by integrating payment processing with your main business management software.
Look for a system that enables you to both process electronic checks and to do direct-debit transactions. (This means collecting from customer bank accounts without having a paper check--such as check by phone transactions, online bill pay, or recurring monthly charges deducted automatically from customer accounts.) You should be charged the same flat transaction amount for direct-debits that you are charged for electronic check transactions. Security is important when transferring funds electronically--make certain that the payment processing system you use has powerful security and encryption tools in place such as a 1024-bit Digital Certificate, 128-bit encryption, and a SSL (Secured Socket Layer) compliant with CISP -- Cardholder Information Security Platform.